A huge number of people live in the belief that in order to increase their financial resources, they should work more and harder. Unfortunately, extending working time leads to fatigue and reduced productivity.
The trend is your friend.
Do you agree that there is nothing easier than following the trend? After all, as David Gartman, author of The Gartman Letter, likes to say, “If the quotation line is going from the bottom left corner of the chart to the top right corner, I have reason to be happy.”
That’s what trend following comes down to. After all, a popular investor adage says: “Trend is your friend… until it ends.” And this is the greatest value of the trend following strategy. Contrary to appearances, it is not about finding great investment opportunities. It is about acting in accordance with the rules and methods that allow you to reduce investment risk. Although at first glance trend following seems to be an uncomplicated strategy, it is in fact a sophisticated, complex and extremely valuable method. It is used by successful investors all over the world.
A trend-following strategy is not the Holy Grail.
But it’s also neither a passing fad nor an overrated black box. Aside from the rules themselves, the human factor plays a fundamental role in this strategy. Sticking to the trend, despite the inevitable ups and downs of the market, requires emotional control and self-denial. Trend-following traders expect fluctuations in the market and include them in their plans in advance.
Cut losses quickly
If a project starts to generate losses, it should be terminated quickly so that the situation does not deteriorate. Difficulties in admitting an error in judgment cause problems with making a decision to sell shares. When the loss increases, the investor says: “Since I have lost so much, now I will hold on and wait until I make up for the loss”.
When we realize that misjudgments of the market situation cannot be avoided, the principle of quick loss cutting will become simple. You are never guaranteed that overpriced stocks will rebound. However, it is important to understand what the value of shares really is. Of course, it is difficult to close a position with a loss, because it is in a way an admission of a mistake. Sometimes, if the shares are under the line and you believe in the foundations, it’s worth holding them, but you have to be honest with yourself whether these foundations are really there or it’s just your wishful thinking.
Let profits grow
If you have a rule that you sell when, for example, the price reaches the assumed level of 20% or 30%, get rid of it. With a strong market, you can sometimes break your own rule. When the price reaches the assumed price, it is worth considering whether it will not go higher.
If the shares held are rising so much, there is certainly a reason for this. It is not worth limiting yourself by your own principle, and try to get the most out of each such successful investment.
Even if the shares grow 50% or 100% in the long term and continue to grow, do not sell them, because you may limit your profits.
Never trade without a defensive stop loss order
A defensive Stop Loss order is a hedge against too severe losses. It is particularly important when trading futures, as it is a hedge against the loss of the entire deposit.
Don’t catch the falling knife
Don’t buy stocks that are “plummeting”, because when emotions rule the market, it is difficult to determine the scale of declines. It may turn out that prices will fall by several dozen percent.
Choose companies with high liquidity
This will allow you to sell shares at any time. The highest liquidity is for the largest listed companies included in the WIG20 index. Each company is marked by a liquidity ratio in the following range: low, medium, high.
Low liquidity means that the cumulative weekly turnover in the company’s shares is equal to or lower than PLN 250 thousand, medium – turnover from PLN 250 thousand to PLN 5 million, high – turnover above PLN 5 million